EPAct 179D Experts

"The least expensive kilowatt, is the one not used."

- Jacob Goldman

The EPAct Tax Aspects of Building Control Systems

As more and more building owners put in very energy-efficient building
equipment, particularly lighting and HVAC, the next step towards achieving
further energy savings is to install building management systems (BMS). These
systems allow building owners and managers to optimize their energy consumption
by adjusting to variables such as time of day, peak demand, temperature,
internal energy use patterns, and building security. The data obtained by
building management and control systems can be used to perform self-diagnostic
and occupancy optimization routines on a frequent basis and to produce trend
analysis and annual consumption forecasts.

Building management systems are eligible for favorable EPAct “free
riding” tax benefits by benefitting from prior energy reductions, meaning
that if a previous qualifying project – on which the building owner did
not take his EPAct tax benefit – met the required energy efficiency
targets, installing the building management system may will result in new
investment EPAct tax deductions.

EPAct Tax Opportunity

The Energy Policy Act of 2005 (EPAct) provides an immediate tax deduction of
up to $1.80 per square foot for building investments that achieve specified
energy cost reductions beyond the American Society of Heating and
Air-conditioning Engineers (ASHRAE) 90.1 -2001 building energy code standards.
A one-time $1.80-per-square-foot deduction is the maximum tax deduction
available, but deductions of up to 60 cents per square foot are also available
for the three types of building systems: lighting, including lighting controls;
HVAC, including HVAC controls; and the building envelope, which includes roof,
walls, windows, doors and floor/foundation (everything on the perimeter of a
building that "touches" the outside world). To obtain a tax deduction of 30
cents per square foot for lighting, the wattage must be reduced by 25 percent
from ASHRAE 90.1 -2001 levels. The maximum allowable tax deduction of 60 cents
per square foot requires a 40-percent reduction in wattage for lighting.

Building Management Technology

Current technologies in building management systems mesh software controls
with demand management programs. A BMS may be designed for a single building or
a group of buildings such as university campuses, office buildings, retail
store networks or factories. The term “building management system”
captures the idea of total building-wide management, but there are two subsets
of this larger group: lighting and HVAC. In the HVAC context BMS can be used
with technologies such as roof-top and air handler units, variable air volume
boxes, chillers, boilers and pumps. When it comes to lighting, which consumes
close to 35 percent of the electricity used in commercial buildings, reducing
the connected load of the lighting system is only a portion of the potential
for maximizing energy savings. The other major portion can be achieved via BMS
through automatic controls such as occupancy sensing, scheduling, tuning,
demand response, adaptive compensation, and daylight harvesting.

Lighting Controls

The key to realizing major tax incentives upon installing a lighting control
system is to first make sure that the building’s underlying lighting
technology is energy-efficient and meets the EPAct watts per square foot
target.

Building Window Daylighting Systems

Building window daylighting systems coupled with heat-reducing solar shades
or window films results in meaningful lighting and HVAC cost reduction
opportunities. Add to that a modern, wireless BMS and the cost reductions are
further accelerated.

For human-occupied buildings like office spaces, the combination of
energy-efficient lighting fixtures and daylight harvesting systems are one of
the optimal ways to achieve a $.60 per square foot EPAct tax deduction.

LED’s

LED’s are mainstreaming and impacting the lighting industry in a
noteworthy, positive way. Despite the fact that when LED’s first entered
the marketplace most analysts and industry experts thought the technology
couldn’t be dimmed, companies like Cirrus Logic are now creating the
chips necessary to let dimmer switches work with the LED bulbs. This changes
the LED landscape in a major way since up until now dimmer incompatibility
problems have been a leading cause of product returns because they can cause
flickering or flashing light or the inability to turn on or off the
light.1

What Exactly Is Daylight Harvesting?

In order to have the full energy savings potential of daylight realized, it
must be incorporated correctly into a building’s electrical lighting
system. The proper way to do this – daylight harvesting – uses
controls that work to adjust internal lighting levels relative to the amount of
sunlight available. These controls can be operated either manually or
automatically and can work so that they either dim the light source
continuously over the course of the day or switch the source to preset light
levels.2

Retail and Industrial Skylight Installations

Today’s technology saves especially large amounts of energy with
rooftop skylight applications. These skylights can enable retailers and
industrial facilities to shut off building lighting for nine to ten hours a
day. Previous generations of rooftop skylights didn’t save anywhere near
today’s energy savings because the light coming through was very heat
intensive. The extra heat increased air conditioning electric costs, which
offset the lighting electrical cost. Now, the new skylights are non-heat
bearing so that the lighting heat reduction actually reduces air conditioning
costs. In addition, many leading lighting controls manufacturers have developed
state of the art solar shades that can reduce heat accretion as well as
damaging UV rays. These shades are powered by an electrical motor and can be
operated by the press of a single button.

HVAC Controls

As with lighting control systems, the key to realizing major tax incentives
upon installing an HVAC control system is to first make sure that the
building’s underlying HVAC technology is energy-efficient.

Qualifying HVAC Equipment

To qualify for an EPAct tax deduction, an HVAC project must reduce energy
costs at least 15 percent below the costs for a building designed to meet
ASHRAE 90.1- 2001. The project must use IRS approved energy modeling software
to show the energy cost savings.

Enough HVAC projects have qualified for EPAct tax deductions that it is
possible to identify types of projects that most often achieve deductions.
Other HVAC projects may also qualify for deductions, but most so far fall into
one of three categories:3

The first category is installation of one or more of 12 categories of HVAC
equipment. Although Section 179(D) deductions are not limited to specific types
of HVAC equipment, and any HVAC project that meets the criteria spelled out in
Section 179(D) would qualify for a deduction, most deductions to date have been
for the following types of projects:

Very efficient heaters in warehouse, industrial and other spaces with no
air conditioning

VAV devices in buildings of less than 75,000 square feet

Chilled beam

Magnetic bearing chillers

Hybrid Gas/Electric Chillers

The second category is installation of any further energy-reducing HVAC
equipment in a building that already meets Section 179(D) criteria of energy
costs that are at least 15 percent lower than a building designed to meet
ASHRAE 90.1-2001. Buildings that already use one of the 12 HVAC equipment
categories generally meet that criterion.

The third and final category is combining energy-efficient lighting with
energy-efficient heaters in non-conditioned spaces and combining LED lighting
with one of the 12 HVAC technologies will often result in $1.80 per sq. ft.
EPAct tax deductions in conditioned spaces.

The Importance of Going Wireless

Innovations in wireless control systems have enabled building owners to
avoid capital intensive projects required to rewire lighting and HVAC equipment
to feed information into the building’s central data processing unit.
What this means is that each component of the energy systems is able to
communicate to the BMS without the burden of having to penetrate walls in the
process of adding wires to connect each component. Further, in building where
there are multiple tenants, wireless control systems enable the building owner
and landlord to track, invoice, and service tenants’ energy usage
automatically. Because the wireless devices also have the capability to feed
information directly to the utilities, building owners will be able to track
and assess energy and water consumption within individual buildings.

This process of utility metering, which can be used for building
owners’ entire building portfolio, generates energy consumption and cost
data that can in turn be entered into benchmark building energy performance
software. This provides building owners’ the data they need to meet their
energy goals and identify strategic opportunities for saving energy.

Along with the advances in wireless control systems, today’s BMS offer
several other advantages over control systems of years past. For instance,
older BMS were typically deployed with proprietary protocols and typically
controlled the bare minimum of systems and services. This made them hard to
integrate and communicate with other manufacturers’ devices, less
powerful and locked out ownership from the freedom to totally integrate an
“Intelligent” building concept. In contrast, modern BMS use open
non-proprietary protocol, are easy to interface to manufacturers’
equipment, have fast Ethernet and Web-enabled devices, and are much more
user-friendly to enable owner customization.

Understanding Demand Response Programs

Perhaps most unique among the investment opportunities related to BMS is the
chance to earn revenue by powering down. In many large jurisdictions, utilities
have developed Demand Response programs whereby building owners can receive a
payment when they power down their building at peak demand hours. For example,
two major companies involved in this initiative are CPower and EnerNOC.
CPower’s website describes the program as follow: “By enrolling in
these programs, participants agree to reduce their electricity consumption in
response to peak system demand, grid emergencies or peak wholesale prices,
thereby contributing to grid stability and lower market prices. Demand response
can be a powerful tool in a company's overall energy management strategy. By
participating in demand response programs, companies can earn significant
revenue while simultaneously reducing energy expenses through lower
consumption. These strategies can help offset the rising costs of energy and
improve a company's bottom line.”

Conclusion

Building management systems offer building owners the opportunity to
fundamentally improve their economic bottom line by controlling their energy
usage with a degree of precision heretofore unachievable. The combination of
“free riding” EPAct tax benefits with demand response revenue means
that the investment in a BMS will realize an enhanced economic payback.